The timing of the cost recovery of the fixed asset may differ between the tax law for a particular jurisdiction and the applicable accounting rules, which can result in a deferred tax asset or liability. A deferred tax often represents the mathematical difference between the book carrying value (i.e., an amount recorded in the accounting balance sheet for an asset or liability) and a corresponding tax basis (determined under the tax laws of that jurisdiction) in the asset or liability, multiplied by the applicable jurisdiction’s statutory income tax rate.Įxample: Generally, the income tax basis in a fixed asset is the purchase price less tax depreciation previously allowed under the applicable tax law. ![]() Simply stated, the deferred tax model allows the current and future tax consequences of book income or loss generated by the enterprise to be recognized within the same reporting period, providing a complete measure of the net earnings. Results in net change of $0M.īS: -$20M decrease on DR liability -$ 20M on shareholder's equity from net income cash increased by $0M.In detail Overview - why are deferred income taxes important and what do they represent? IS: -$20M decrease either on revenue or as expense, resulting in -$20M change on net incomeĬF: -$20M from net income add back +$20M since not a cash expense changes from Deferred Revenue on BS don't affect Changes in Working Capital line item since it's an accounting adjustment. Let's assume no taxes to make it easier Given these assertions, how does a haircut flow through the pro forma statements? I'm currently stuck in the following steps: See rows 35-49 and 71-81 from " GAAP" tab from Macabus merger model (the perpetuity growth linked in earlier posts)ģ) DR write-down affects Income Statement either on top-line or as an expense (see row 47 from "PF P&L" tab from Macabus model and public filingsThis doesn't quite match what was mentioned in earlier posts about a pre-tax gain.Ĥ) Haircut is an accounting adjustment, not really affecting cash. Just a follow-up on this topic, I might be missing something but it's still not too clear how a deferred revenue haircut affects all three financial statements and ends up with a balanced BS.ġ) Deferred Revenue write-down is done after the transaction closes and is not included in the "initial" pro forma Balance Sheet"Note that the new goodwill creation, intangibles write-up, PP&E write-up, new deferred tax liabilitycreation, and write-down of the deferred tax asset all occur "at the instant" of the transaction, whereas deferred revenue is written down after the transaction closes."įrom: Breaking into Wall Street Merger Model Cheat Sheet -Ģ) DR write-down is not included in the Purchase Price Allocation and doesn't affect Transaction DTL If I could trouble you to look at the model, see GAAP tab ( ), the purchase price allocation section does not factor into account the deferred revenue adjustments. ![]() I am clear about question 1 but don't really understand question 2 still. These adjustments are made during purchase price allocation and will impact goodwill. You are confusing the timing of the journal entries. If there is no future performance obligation or the acquirer has VSOE that remeasures the amount booked, you have to take that into account. Or it could be that the services were performed and cash was collected but the client hasn't formally accepted delivery or signed off on software or equipment meeting customized requirements.Īs is the case with assets in an acquisition, you also have to measure the assumed liabilities at fair value. Could be the recognition was deferred due to questions about collectability or in TMT a lack of vendor specific objective evidence that supports the valuation and recognition of certain streams of a multiple element contract. It isn't always about cash and unperformed services. You are oversimplifying deferred revenue.
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